Why Smartphone Subsidies Won't Die
T-Mobile USA would love to kill phone and tablet subsidies, but it'll never happen. Here's why.
Smartphones don't really cost the $99 to $299 that most people pay for them at the cash register. In fact, they often cost two or three times those amounts. In order to reduce the price to more consumer-friendly levels, wireless network operators (read: AT&T, Sprint, T-Mobile USA, Verizon Wireless, et al.) subsidize the cost of the handset.
Rather than charge consumers full price for smartphones, the network operator eats some of the cost of the hardware upfront. It then recoups the subsidy from the consumer over the course of a two-year contract, which typically runs $1,500 to $2,500 in total.
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This model has created an addiction for electronics, such as smartphones, that will probably never be cured unless the "cold turkey" method is employed by every participant in the wireless industry at once.
"It actually distorts what devices actually cost and it causes OEMs, carriers--everybody to compete on different playing fields," said T-Mobile USA CTO Cole Brodman, speaking at the GeekWire Summit in Seattle earlier this week.
He's right. The Motorola Droid RAZR MAXX, for example, is available from Verizon Wireless for the on-contract price of $299. Unsubsidized, the full retail price of the RAZR MAXX is the more formidable $649. The iPhone 4S (16 GB) has a similar subsidy. The on-contract price is $199, but the full retail price is $649. That's $20 more than the full retail price of a 3G/4G iPad.
[ Apple's new iPad will shake up the mobile network picture. See New iPad: Mobile Network Winners And Losers. ]
Which price do you think consumers choose when it comes time to buy a new smartphone? Most go with the subsidized price.
"I think it is really difficult," continued Brodman, "especially from a consumer perspective, because it causes consumers to devalue completely the hardware they are using. It is amazing hardware, but it has become kind of throw away. So, it is unfortunate, you've got dual-core, multiprocessor devices with amazing HD screens that get thrown away at 18 months."
Aside from hoping customers fulfill a two-year contract before updating to a new smartphone, network operators also use early termination fees. The ETFs serve two purposes: 1. Provide an economic incentive for the customer to stay with the carrier; 2. Recoup the cost of subsidized hardware if the customer chooses to leave before the end of the contract. ETFs for smartphones typically run $350, minus $5 or $10 per month that a customer remains with the carrier.
Since no one wants to pony up $600 or $700 every 12-24 months for a new smartphone, the subsidy model will remain. Subsidies, in effect, allow consumers to finance the cost of the smartphone over two years. Why pay upfront when you can rent-to-own? Isn't that the American way?
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